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It’s coming: The emergence of second-class mobile citizens

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Carriers in the U.S., Europe and Japan are building out LTE networks to deliver faster mobile data connectivity in droves. According to the GSM Association there are 1 million LTE connections today and there will be 300 million by 2015. These networks are heralded as good enough for watching movies, video chat and even as a transmission medium for television news! But marketing is beginning to meet reality as people realize that their blinding fast connections come with a catch–a data cap.

But carriers are preparing ways to change their pricing to charge by applications or services. And as they do, consumers will lose — namely because carriers will offer a variety of their own services that could strangle the quality of anything one might consider over-the-top.

Caps are crap, and operators know it.

Some folks see the caps and think that the speed with which someone hits the cap makes 4G service pointless — a recent report by Public Knowledge likens 4G data plans to “magic beans” and shows how someone hits the 2GB data cap imposed by AT&T (which currently doesn’t have an LTE network, only an HSPA+ network it markets as being 4G) in less than an hour of continued use. The more technically savvy point out that even without the caps LTE isn’t really a great solution for delivering the HD video that mobile operators like to show off as hall marks of their service.

Source: Public Knowledge

Operators aren’t dumb, and are testing products to reach their end goal — charging folks not for buckets of data, but for services. So a consumer might buy a data package as well as a video chat package for $5 more a month. Shubh Agarwal, VP of Marketing for Mavenir Systems (see disclosure), says that carriers believe that the transition to LTE is really their last chance to avoid becoming a dumb pipe delivering data. Mavenir sells gear to telecommunications providers that delivers quality assured video chat, presence and other services.

The tools for changing the pricing paradigm are here.

He says carriers like his company’s gear because it allows them to control the quality of the customer experience for high-bandwidth consuming services such as video chat. As an example, because the carrier knows how many people are trying to video chat at a single tower, it can lower the quality on the calls to ensure everyone has some connection. An over the top service on the other hand may just refuse to work. Or as explained in this blog post from Allot Communications on the Mythbusting: Top Three Misconceptions about LTE:

Mobile data charging is a pickle for most operators. When offered quota-based plans, subscribers react with confusion (not at the least alleviated by data plan calculators and other visualization aids). Frustration comes next, when they are offered ‘unlimited’ data plans, but those are too slow or get throttled. Selling bits and bytes simply doesn’t cut it anymore. Strand Consult is already predicting pricing model failure, suggesting that “any operators that believe they can increase prices by [simply] introducing LTE are in our opinion naïve.”

Forget about a Facebook phone, what about a Facebook broadband plan?

Allot goes on to suggest what will emerge is a quality of experience metric for showcasing how content looks on various networks as a means of differentiating between them and thus making one more “valuable” than others. So instead of call quality or “fewer dropped calls” networks might advertise their video quality, with those buying the carrier’s service getting the best-quality picture. It also suggests that carriers will charge by applications.

So while most operators implement tiered plans or claw back benefits consumers enjoyed under unlimited plans, there’s a bigger game at play.

Charging for services creates a mobile broadband class system

This week Sandvine, a maker of deep packet inspection and ISP billing gear, released software for mobile operators that can track every bit and bill for it appropriately through custom plans. From its release on the update to its software:

Additionally, the new release allows operators to create a virtually unlimited number of service plan offerings, by enabling operators to differentiate the service plans using combinations of application, location, device awareness, access technology, and volume or time metrics.

The net neutrality debate will never die.

The tools are there and operators will deploy them. So what does that mean for consumers? When it comes to services such as video chat, Tango, Skype or others aren’t going away just because a carrier might use Mavenir’s gear to offer its own branded service which delivers a higher quality of experience. When the FCC implemented its network neutrality rulesit said operators can’t discriminate against over the top services in the video and voice space but it also said problems would be dealt with on a case-by-case basis. But as carriers charge users for services, it creates the potential for carriers to optimize their pipes for their own services and leave a smaller section of bandwidth available for over-the-top services.

This debate was brought up and then ignored in the debates over wireline network neutrality and it’s likely that regulators will shy away from trying to control how operators control their pipes or what types of services they can offer. Which then means that for consumers that don’t want to pay a la carte for carrier-supported products when there’s an existing OTT option, may only have the threat of competition from other mobile broadband providers to keep their mobile broadband provider honest. Which is yet another reason AT&T swallowing T-Mobile could be bad for consumers.

Mavenir is backed by Alloy Ventures, an investor in GigaOM’s parent company, GigaOmni Media.

21 Responses to “It’s coming: The emergence of second-class mobile citizens”

  1. Very nice story Stacey — thanks for the analysis.

    Our firm Box Top Solutions has been looking into these developments as well and sees a new trend evolving that should actually help users (especially low income or unconnected users) get and stay online for free or very low cost. The trend is “toll-free web apps” where the sender (govt agency, content provider, merchant) arranges to have their content bytes sent for free (or subsidized) to the end user (just like a 1-800 voice call in the days of high long distance charges) by pre-loading free bandwidth packages into their particular app (Android, webOS, etc.). As markets see more and more data caps, people will save their bytes for higher value content (as scarcity dictates), thereby driving content providers to aggressively compete for the attention of these customers by shouldering the burden of bandwidth on behalf of their customers (just like merchants did with 1-800 phone lines). In addition, the regulators should also like the model (we call it “FreeBand”) since it is just one more choice for an end user (FreeBand does not limit existing tariff options for end users, but adds to them).

    In fact, this free delivery model is exactly what Netflix does today with their DVDs — they provide “free delivery of the bytes” (which are encased in the plastic DVDs) by paying the US postal service for freight charges. Their free bytes delivery model has been a huge success and it is just a matter of time before this model for the free shipment of bytes makes its way into the Internet delivery market — helping end users avoid high bandwidth charges each month. So while data caps may cause short-term pain in certain markets, it will also drive long-term innovation in others and make many forms of connectivity more affordable for end users — whether that toll-free connectivity is tied to govt services, education, job training, healthcare, or simply downloading movies. As for what content will come bundled with free bandwidth, the “invisible hand” of the market will dictate the app bundles just like it does for all other forms of free delivery (books, flowers, pizzas, DVDs, etc.).

  2. Love that subhead: “Charging for services creates a mobile broadband class system.” So, what would you suggest: broadband Communism (“To each according to his greed”)?

    The fact is that charging for services rendered according to what they cost is both reasonable and fair. But GigaOm’s sponsor, Google, wants to suck all of the money out of the Internet ecosystem and so doesn’t want ISPs to make a dime… and, apparently, GigaOm is going along. Zero journalistic integrity.

  3. Just like MCI was launched for truckers wanting to beat high priced payphones,systems will spring up to fell yet another communications giant.
    Whitespace ,interlinked personal mesh networks,peercasting offered by businesses as you walk or drive nearby,cars meshed together,are all simple ideas that can work.
    People who want to get tied in by these carriers can stay, but others will find a way to leave. Then what do the carriers have?

  4. I really believe the economy will be more of the dictation to the cell companies myself. I have been watching the interest the cell companies have in wifi and that’s really what disturbs me. They know as technology advances more and more people will go wifi rather than have cell phones. As tablets and players transform to the mobility size, services like skype and other messaging services will dominate because of their thriftiness. In my own experience my phone calling time has decreased greatly, due to the ability to text. Myself paying over 200 plus dollars a month with 3 data and 1 cellphones, wifi is on my mind continually.

  5. ʞǝɹɐɯ sɐɯoʇ

    Well, you’ve forgotten Apple altogether in your analyzes. All the situation on the wireless market is just ripe for Apple to move up. Considering the slim design trend, data center constructions, integrated SIM patent, etc., you must come to conclusion, that Apple is about to become a virtual operator, providing easy billing and customer retention to operators, and allowing for free roaming for business customers. So yes, LTE is not the last chance for operators. In fact, it’s their first chance to invest in their infrastructure.

    • Data roaming has already been mandated by the FCC. I think that current plan prices are greedy enough, so data roaming in AMERICA should be free for all. Especially when billions a month are made in profits and of course all business costs are passed on to the consumer at triple what it costs the businessman. This is passed on to each business in the chain, maybe 5 or 10 times. Sooner or later the economy suffers.

  6. Anirvan Lahiri

    This is a pretty misleading post. Disclosure: I work with an operator). For a number of reasons

    1. It homogenizes operators. Some might do what you are describing but it is far from clear that every major operator will

    2. Wireless data has structural limitations compared to fixed – i.e. there is always the possibility of localized overloads at the basestation level. These limitations have not been designed in by crafty operators – they are integral to the network topology of wireless networks. Attempt by operators to provide QoS are attempts to manage around these limitations, not a conspiracy to sabotage OTT apps. The more data intensive OTT apps are liable to fail even without operator QoS-driven intervention. Conversely, it is perfectly possible that some operators choose to expose QoS capabilities to 3rd party developers so that they can bake in QoS management into their service delivery.

    3. There is an excellent argument to be made that service specific charging models will be much better aligned with end user interests than current volume based charging models. Current cents per MB pricing models are at odds with customer behaviour – video may only be 5% of customer mobile usage but 80-90% of the bill. Service specific pricing models would allow operators to de-average pricing based on actual consumption profiles for different services and free non video users from having to subsidize video users.

    4. There is a reasonable prospect that service based models will align revenues with costs and rescue mobile data network business cases. Service based charging could actually make it more, not less palatable, for operators to become smartpipes since it will let them monetise based on the value, not the volume of traffic. Yes, customers will still need to pay for mobile data (the horror!) but OTT services will not find operators standing in their way

    A little more balanced coverage please. Operators need a little love too :-)

    • I agree. Charging by service instead of volume makes sense for wireless. It’s a bit naive to think caps and the current model of data as a utility is going to work in the long run. Data has variable value. It’s more like cable service, where you pay for the value of the channels, not like the electric utilities. Much as everyone dreams of cheap unlimited plans and net neutrality, it’s just not realistic. The content creators/owners are charging variable rates based on demand and the carriers are going to do the same.

    • Garret McGraw-Hanson

      I think the issue is more the potential for abuse that this allows carriers by allowing them to prioritize apps and by further obfuscating information about what exactly we’re paying for.

      It reminds me of how we pay separately for calling and texting. Both services are way overpriced in terms of data usage, even next to your ridiculously expensive data plan.

    • Anirvan, I do love operators. I understand the limitations they face and realize that not every operator will do what I am describing, but the potential for abuse is there and that’s what I want to draw attention to, especially as the U.S. weighs a merger that will reduce competition — which is really the best hedge against misbehavior.

    • Give me a break. These are the same bunch of idiots who rob us with their completely over prices text messaging plans. They will simply apply the same logic to “services” attempting to extract more money ultimately from the consumer. News flash idiots, we have no more money to give you per month. How about you spend less on advertising network speeds you don’t have and spend more on making using these network suck less instead of more.

    • 1. Wrong. Operators are doing a good job of “homogenizing” themselves, no need for Stacey Higginbotham to do it for them. It’s called consolidation and if the AT&T – T-Mobile merger is approved, and with the continued marginalization of Sprint, the AT&T – Verizon duopoly will give consumers a market that is about as homogeneous as it can get.

      2. Wrong. The “craftiness” actually dates back to the AT&T “Ma Bell” era, where AT&T would sign up and bill far more customers than its hardware-based switch network could handle. Anyone trying to make a call on Mother’s Day can attest to that. We now live in an era where mobile operators sign-up and bill users knowing full well that network limitations will make it impossible for them to obtain advertised teaser data rates. That’s almost the definition of “crafty.”

      3. Wrong. When is it in the end-user’s best interest not to obtain the best deal for their money? When it comes to video, consumers have choices: Netflix, Hulu, YouTube,, etc. Choices mean competition and better service at better prices. If mobile operators compete on an equal footing with existing video service providers, while good for consumers, it would limit the operators ability to set prices. Instead, operators will opt to limit or eliminate the competition by limiting their access to the operator’s pipes. Bad for end users.

      4. Wrong. Moving to a service based business model would only allow the crafty homogenous mobile operator barons to put the squeeze on both content providers and content consumers. Instead, consumers should recognize that fundamentally mobile operators provide bytes and that we should insist that they use investment and innovation to provide as many bytes as possible at fair prices in a competitive environment.


      “A little more balanced coverage please. Operators need a little love too :-)”

      Just because you don’t agree with a particular commentator’s points doesn’t mean the coverage isn’t balanced. However, making such a claim without basis is good evidence for bias. Further, I’ll give the carriers a little love when they do the same for their customers …

    • Peter Antypas

      I think both of these technologies are near the top of their respective “S” curves. The improvement in efficiency between MPEG2 and H.264, for instance, was 2x over nearly two decades.

  7. “Operators aren’t dumb”. Yes, they are. They will offer an over-priced, over-promised service, with all kinds of limitations and restrictions, and when it doesn’t sell, they will wonder where they went wrong. In fact, they are so dumb, they want to avoid being a dumb pipe delivering data, which is what they should focus on, as they are barely competent at that, let alone selling entertainment or other non-communications services.

    And if that’s their stated goal, there’s no way ATT should be allowed to acquire T-Mo. The finite spectrum that is available to the public should not be allocated to a company that wants to use it to gain an advantage in content delivery. If the content delivery companies like Amazon, Apple, Netflix had a little more foresight, they would be against the T-Mo deal, because it will concentrate even more power in the hands of ATT, who wants to limit customer access to the carrier-less content retailers.